End in sight for Brazilian rate rises

Inflation data and comments from Brazil’s interest rate setting committee Copom point to an end in the country’s tightening cycle

Brazil’s central bank is likely to wind back
interest rate hikes at its next meetings, analysts said on
Thursday after the monetary policy committee published the
minutes of its most recent meeting.

The committee, Copom, said while the global economy was
picking up, activity in Brazil was moderating. Analysts
interpreted the comments as a signal that the benchmark Selic
rate may rise by 25 basis points at Copom’s next
meeting in February — but that could be the last
increase for the year.

"Given [Copom’s] extensive explanation on a
more benign reading of the domestic economy, we believe the
tightening cycle is near the end," said economists at Bradesco
BBI.

That view was reinforced by lower than expected inflation
data published also on Thursday. Brazil’s IPCA
data indicated annual inflation of 5.63% to January, down from
5.85% in December.

Brazil began a tightening cycle in April 2013, when Copom
raised the Selic rate by 25 basis points. At each of the six
subsequent meetings it has lifted rates by 50 basis points.
The Selic stands at 10.5%.

Analysts at Bank of America Merrill Lynch, Barclays,
Bradesco, Goldman Sachs and Itaú predict the central
bank will slow the pace of rate hikes at its next meeting on
February 26.

"It is the combination of weaker growth and slowing
inflation that should push the BCB to moderate the pace of
hikes in February," said analysts at Barclays. The investment
bank expects rate-setting committee to hold the Selic at 10.75%
this year, after a 25bp raise at the next meeting.

Economists at Itaú BBA also forecast a 25bp rate hike
in February, saying that subsequent moves will depend on
data.

Goldman Sachs analyst Alberto Ramos noted that Copom has
been emphasizing its uninterrupted rate rises since April and
the fact that those will have a lagging effect on
Brazil’s sticky inflation data. "All this, in our
assessment, indicates that although the Copom will extend the
tightening cycle, it is on track to taper the magnitude of rate
hikes." LF

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